Business context and reporting period
Westlake Chemical Partners LP filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The Partnership owns 22.8% of Westlake Chemical OpCo LP (OpCo) and controls it through its general partner; the consolidated results include OpCo, with Westlake’s 77.2% interest presented as noncontrolling interest. OpCo operates three ethylene production facilities and an ethylene pipeline. Figures below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $238.5 | $270.1 | $489.0 | $569.1 |
| Gross profit | $90.0 | $92.0 | $193.6 | $182.6 |
| Gross margin | 37.7% | 34.1% | 39.6% | 32.1% |
| Income from operations | $83.9 | $84.3 | $181.2 | $168.0 |
| Consolidated net income | $80.4 | $80.1 | $174.1 | $158.5 |
| Net income attributable to the Partnership | $14.9 | $13.7 | $32.6 | $28.7 |
| MLP distributable cash flow | $16.9 | $16.4 | $35.2 | $34.0 |
| EBITDA | $109.8 | $112.3 | $233.8 | $223.7 |
Second-quarter sales fell 11.7% year over year, as a 13.6% decrease in sales volume outweighed a 1.9% increase in average sales price. For the first half, sales fell 14.1%, reflecting lower average prices (down 8.9%) and volumes (down 5.2%). Lower manufacturing costs and higher earnings on ethylene sold to Westlake supported margins and first-half operating income despite lower production. Lower interest expense also helped Partnership-attributable earnings.
First-half operating cash flow was $223.7, up from $213.7 a year earlier. Investing activities used $29.6, including $20.6 of capital expenditures; financing activities used $190.4, mainly distributions. At June 30, cash was $23.6 and $171.4 was invested with Westlake under the Investment Management Agreement, which provides daily availability. Total debt was $399.7, all payable to Westlake affiliates and variable-rate; the weighted-average rate was 3.4%. The Partnership reported compliance with debt covenants. Current assets included $171.4 due under the investment agreement and $42.4 of Westlake receivables.
Distributions, outlook, and material risks
- The board declared a quarterly distribution of $0.4714 per unit, payable August 24, 2020. Second-quarter distributions to common unitholders were $16.6 versus $14.9 of Partnership-attributable net income; first-half distributions were $33.2 versus $32.6 of attributable net income. The Partnership states it has no legal or contractual obligation to pay distributions at any particular rate.
- Management reported no significant operating disruption from COVID-19 through June 30 and did not expect significant disruption, citing the take-or-pay arrangement for approximately 95% of production. However, weak ethylene and co-product prices and lower plant operating rates persisted; production could be idled if third-party sales are uneconomic. The Petro 2 turnaround was deferred to the first half of 2021 and is expected to last 60 days. No quantified earnings or distribution guidance was provided.
- Westlake represented 95.4% of Q2 sales and 90.4% of first-half sales. The cost-plus ethylene sales agreement and related-party arrangements are central to revenue, operating costs, and liquidity.
- All debt bears variable rates. A 100-basis-point increase would raise annual interest expense by approximately $4.0 based on period-end debt. The MLP Revolver was amended to extend maturity to March 2023 and provide for a LIBOR replacement.
- The filing describes an EPA flare-enforcement matter involving the Calvert City and Lake Charles facilities. The Partnership says resolution may require a monetary sanction “in excess of $100,000”; the filing text does not provide a clear unit for that amount. Westlake has agreed to indemnify certain pre-August 2014 environmental and other liabilities. Management does not expect the other legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Confirm the scale and unit of the potential EPA flare-related sanction and the status, allocation, and expected timing of any resolution.
- Monitor Westlake’s financial and operational ability to meet purchase commitments and the Partnership’s high customer concentration and related-party exposures.
- Track ethylene prices, operating rates, third-party sales, COVID-19 effects, and the timing and cost of the deferred Petro 2 turnaround.
- Assess variable-rate debt, covenant headroom, LIBOR transition, and the availability and terms of Westlake-provided liquidity.
- Compare distributable cash flow with distributions and capital, turnaround, and maintenance needs; distributions are not contractually guaranteed.